How joint ventures help companies expand opportunities
Joint ventures are collaborative business arrangements where two or more parties come together to form a new entity or partnership. The partners in the joint venture use contracts or a new corporate entity to pool resources, expertise, and capital in pursuit of a common business objective.
Although joint ventures are common, there is no single legal definition or accepted structure. Each deal requires careful consideration of its advantages and challenges.
Key Points
- Joint ventures allow companies to share resources and generate profits.
- Several legal structures can be used to create a joint venture.
- Joint ventures require ongoing management to succeed.
Why companies set up joint ventures
Joint ventures allow two or more companies to work together on a new project, sharing the financial and operational risks in the process. They are commonly used for government contracting, international expansion, and bringing new technologies to market.
The different partners bring different things to the table. For example, a joint venture might help a company with strong research and innovative products find new markets through a partnership with a company that knows how to sell in different parts of the world. Or a company with technology for consumer use might enter into a joint venture to adapt and sell its products for business applications.
Joint venture examples
- Expertise sharing. In 2000, office software and cloud computing giant Microsoft (MSFT) teamed up with management consultant Accenture (ACN) in a joint venture called Avanade, which uses the strengths of both companies to help clients solve enterprise business problems.
- International expansion. In 2012, Starbucks (SBUX) partnered with Tata Global Beverages, part of Indian conglomerate Tata Group, to form TATA Starbucks Ltd, which allowed the coffee giant to access and quickly expand in the India market.
- Shared project vision. In 2016, ride-sharing platform Uber (UBER) joined forces with Swedish automaker Volvo to develop self-driving cars.
- Cost-cutting and/or other efficiencies. This may take the form of a vertical supply-chain efficiency (such as Coca-Cola (KO) partnering with bottling companies), or it might be a horizontal agreement, such as when airlines create code-sharing alliances.
The U.S. government encourages its contractors to form joint ventures, especially when they can help small businesses participate in government contracts. Chances are good that your employer or a company that you invest in is involved in at least one joint venture. (For a public company, a proxy statement and footnotes in its annual report will tell you for sure.)
Types of joint ventures
A typical joint venture involves setting up a separate legal entity that both partners own. This both protects the assets of the joint venture partners and gives the venture managers greater autonomy. But there’s no one way to do a joint venture. They take many different legal forms depending on the nature of the business and the objectives of the participants.
In the U.S., a new joint business is usually a limited liability company (LLC). International joint ventures are often structured as equity joint ventures, with the parties contributing capital and assets to form a new entity. Ownership is then divided among the participants based on their respective contributions.
Companies don’t have to set up a new business organization, though. The partners can establish a new joint venture through a contractual agreement instead of setting up a new legal entity. The parties negotiate a contract that sets out the terms of cooperation. These ventures are usually limited to specific projects or collaborations. Otherwise, the contracts quickly become unwieldy.
The usual alternatives to joining ventures are mergers and acquisitions, which tend to carry more costs, complications, and risks. In a merger or acquisition, instead of setting up a new company with joint ownership, one partner takes over the other.
Challenges of joint ventures
Joint ventures are less risky than mergers or acquisitions, but they can run into problems. As in any relationship, the parties may have different goals and interests that could lead to conflicts. Organizations may have different cultures, especially for joint ventures that cross international borders.
The bottom line
Joint ventures bring together two or more partners to share resources on a new line of business. They offer avenues for growth, risk mitigation, and access to new opportunities. Whether structured as a separate legal entity or created through contractual agreements, joint ventures require careful planning, effective communication, and well-structured agreements to succeed.
When executed thoughtfully, joint ventures can be a powerful tool for companies seeking to expand their reach, diversify their offerings, and navigate the challenges of today’s dynamic business landscape.
Specific companies are mentioned in this article for educational purposes only and not as an endorsement.